Later talking to media Chidambaram said high on his agenda is an omnibus insurance law that would help the government to raise the FDI limit in the insurance sector from 26 per cent to 49 per cent.

The Budget has been presented against a backdrop of a fairly well performing economy growing at 6.9 per cent. There has been a significant rise in industrial production backed by a stronger business confidence index. The equity markets have been buoyant and the external sector has been stable, said Deepak Parekh, chairman, Housing Development Finance Corporation.

However the tax break in the Budget proposal regardless of their income and irrespective of instruments to an extent of Rs one lakh, unlike the existing tax rules (Section 88) has got life insurers rattled. They are now contemplating selling more pure life insurance products. Further, a redesigning of existing products, greater emphasis on distribution and an increase in premium are on the cards.

In the absence of any tax benefits, life insurers fear they may lose a large chunk of business and hence, premium income to other competing investment avenues.

The individual life products will be the most affected by the withdrawal of the Section 88 benefits and in this category, traditional products such as endowment and money back will be the hardest hit, said the industry sources.

Even investment products such as unit-linked insurance plans, which caught the fancy of individuals last year, may lose out to mutual funds if insurers fail to lower the cost (to buyers) of ULIPs to bring them at par with mutual funds.

While savings will receive a boost with the introduction of a consolidated deduction of up to Rs one lakh, retaining exemptions such as interest paid on housing loans, medical premia, etc, reflects the finance ministers deft handling of direct taxation. The removal of section 80L, however, puts a depositor at a distinct disadvantage, explained Parekh.

The government’s proposal to impose a 30 per cent tax (33.66 per cent after a 10 per cent surcharge and two per cent education cess) on the fringe benefits offered by companies to their employees is all set to burn a deep hole in India Inc’s pocket.

“The burden on tax will actually increase on account of tax on fringe benefits,” said RN Bhardwaj, chairman, Life Insurance Corporation of India (LIC). Bhardwaj agreed that withdrawing specific tax proposals from life insurance products and clubbing them with other products which will be eligible for tax exemption under Rs one lakh category will affect the life insurance market.

Moreover, all insurance products – excepting pension – are tax free upon redemption under section 10 (10D). This section has not been removed in the Budget, which is a big plus for insurance plans.

Nani Javeri, CEO, Birla Sun Life, said that the company will take the new tax proposal as an opportunity for selling long-term savings such as pension policies and endowment products, and aggressively compete at acquiring the consumers investment of Rs one lakh.

So far, life insurance companies were using the rebate under the Section 88 as a tax concession tool to sell life insurance policies.

The superannuation fund – or the retirement fund many companies build up and is given to the employee at the time of his retirement — will now fall under the tax net as the finance ministry has decided to impose service tax on what it considers are ‘fringe benefits’. Superannuation is among the many items that fall under the list of fringe benefits given to employees by the employer.

The full employer contribution under superannuation would be taxed at the rate of 10 per cent service tax. This might result in some corporate houses choosing not to offer this ‘fringe’ benefit, which is not compulsory, but helps individuals secure their lives post-retirement.

Chidambaram had in his Budget statement had announced that that the country would move towards an EET regime (acronym for exempt, exempt, taxable) which essentially means exemption at the time of contribution, exemption at the time of accumulation and taxation at the time of withdrawal.